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Investors pursuing a solid, dependable stock investment can often be led to Quest Diagnostics Incorporated (NYSE:DGX), a large-cap worth US$13b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. I will provide an overview of Quest Diagnostics’s financial liquidity and leverage to give you an idea of Quest Diagnostics’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DGX here.
DGX’s Debt (And Cash Flows)
DGX has built up its total debt levels in the last twelve months, from US$4.0b to US$4.9b , which includes long-term debt. With this increase in debt, DGX’s cash and short-term investments stands at US$464m , ready to be used for running the business. Additionally, DGX has produced US$1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that DGX’s current level of operating cash is high enough to cover debt.
Can DGX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$2.3b, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$1.8b, leading to a current ratio of 0.78x. The current ratio is calculated by dividing current assets by current liabilities.
Is DGX’s debt level acceptable?
With debt reaching 80% of equity, DGX may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether DGX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For DGX, the ratio of 6.95x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes DGX and other large-cap investments thought to be safe.
DGX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how DGX has been performing in the past. I recommend you continue to research Quest Diagnostics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DGX’s future growth? Take a look at our free research report of analyst consensus for DGX’s outlook.
- Valuation: What is DGX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DGX is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.